The rich will pay more in taxes next year regardless of the outcome
of the fiscal cliff. That's because two new taxes enacted to fund
President Obama's health care reform are kicking in come January.
The new levies will help foot the bill for the program to expand
health care coverage for the uninsured, which involves government
subsidies for lower- and middle-income Americans.
The vast majority of taxpayers will escape unscathed, however. Fewer
than 2% will be subject to the new taxes, said Roberton Williams, a
senior fellow at the Tax Policy Center.
Here's what's coming:
Medicare payroll tax: Single taxpayers earning more than $200,000 and
couples making more than $250,000 will have to pay an additional 0.9%
payroll tax on the amount they earn above those thresholds.
Unlike traditional payroll taxes, however, this tax will be based on
household income, not individual earnings. So couples may find
themselves subject to it even if they each make less than $250,000.
That could lead to a surprise at tax time since employers withhold payroll taxes only on their own workers.
For instance, if a husband and wife each earn $175,000, they will owe
the additional tax, but their employers likely will not have withheld
it. So they will owe $900.
Investment income tax: Wealthier taxpayers with investment income
could be subject to an additional 3.8% levy. Investment income includes
interest, dividends and capital gains, among other things.
The formula is somewhat complicated. Only those with modified
adjusted gross incomes above a threshold of $200,000, or $250,000 if
married, need be concerned.
But filers don't always owe tax on all their investment income. It's just on the investment income that exceeds the threshold.
For example, if a married couple has income of $300,000, of which
$275,000 is from wages and $25,000 is from investments, they would owe
the tax on all the investment income, or $950 in taxes.
But if the same couple had $125,000 in investment income, they would
owe tax only on $50,000, or $1,900 in taxes, because that's the amount
that exceeds the threshold.
Deduction for medical expenses: Also, it will become harder to deduct
medical expenses, though this deduction is more common among middle
class taxpayers.
Until now, taxpayers could deduct medical expenses that exceeded 7.5%
of their adjusted gross income. This level is rising to 10% next year.
One-third of the people who took this deduction had income in the
$50,000 to $100,000 range in 2010, according to a CNNMoney analysis of
Internal Revenue Service data. Only a tiny fraction of the rich took
advantage of this deduction because their high incomes made it hard to
reach the threshold.
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